Tuesday, November 03, 2009

Trading and Response Inhibition

A trader recently told me of an interesting problem. He had no trouble making money during the trading day. His problem was holding onto the money. Basically he kept trading until his profits were gone. After repeating this pattern day after day, he was left with the frustrated sense of being a talented trader who had nothing to show for his talents.

His problem is in an area that cognitive neuroscientists call "response inhibition". Response inhibition is the ability to suppress actions that are no longer useful, so that attention and behavior can be channeled more fruitfully elsewhere. A function of the frontal cortex of the brain, response inhibition is central to executive control: without the ability to hold off unwanted behaviors, we cannot direct ourselves toward meaningful goals.

We generally think of trading simulations as teaching the ability to trade. For some, however, their value may be even greater as tools for learning to not trade. In other words, simulations can be used to exercise one's capacities for self-control. One way of accomplishing that would be to limit the number of "clicks" allowed to the trader during a trading session: if only a limited number of trades can be placed, the trader's task becomes one of finding the best opportunities to make the clicks. Most importantly, the trader learns in ambiguous situations to *not* click: to inhibit the trading response.

It is common to hear traders describe trading as 90% psychological. It could be, however, that the lion's share of trading is neurological: dependent upon our wiring for planning, control, reasoning, and proper response inhibition. Training programs teach people to make trades; some traders, however, could equally benefit from a gymnasium of the mind that trains them to refrain from action..

About Me

Author of The Psychology of Trading (Wiley, 2003), Enhancing Trader Performance (Wiley, 2006), and The Daily Trading Coach (Wiley, 2009) with an interest in using historical patterns in markets to find a trading edge. I am also interested in performance enhancement among traders, drawing upon research from expert performers in various fields. I took a leave from blogging starting May, 2010 due to my role at a global macro hedge fund. Blogging resumed in February, 2014, along with regular posting to Twitter and StockTwits (@steenbab).